Three recent encounters have reminded us just how powerful inertia can be.
When Newton wrote that "every body perseveres in its state of being at rest or of moving uniformly straight forward, except insofar as it is compelled to change its state by force impressed," he probably didn't have defined-contribution retirement plans in mind. But it's no great leap to take his First Law of Motion and apply it to the world of 401(k), 403(b), and 457 plans.
Encounter One: Prompted by one friend of ours, another friend asks for a little help with her 401(k) allocation. So we take a look, and here's what we find: A very typical menu of roughly 20 mutual funds, split between the biggest, most bloated brand names in the industry and index funds with expense ratios greater than 0.5%. Other plan characteristics: Only one international equity option, no REIT funds, and no commodities vehicle. So the investment options were mediocre at best. And what had our friend done with those options? Her deferrals were split 50-50 between U.S. large-cap stocks and U.S. small-cap stocks. That's it. That was the totality of her "asset allocation."
The good news is that she has saved diligently and accumulated a decent nest egg for someone who's only 34 years old. She should be proud of herself for that. But how much larger would her account be if she had participated in a richer mix of asset classes? How much larger would it be if she'd paid legitimate index-fund prices of 10 to 25 basis points rather than inflated tariffs for mediocre actively-managed funds? Back to Newton: This investor would have simply stayed in motion had we not changed her course "by force impressed." We were happy to do so, but we shudder to think of how many millions of Americans remain saddled with wildly sub-optimal retirement plan options and strategies.
Encounter Two: We recently had lunch with two accomplished ERSIA attorneys, one very senior, the other relatively junior. When we asked the senior attorney about plan sponsors' awareness of their fiduciary duties and risks, he stated in no uncertain terms that they (plan sponsors) have a very limited understanding of the nature and scope of their responsibilities under ERISA and the Pension Protection Act of 2006. Which, in our Newtonian world, is one reason so many thousands of retirement plans remain so poorly constructed. In the absence of a powerful outside force, many plan sponsors demonstrate an equally powerful form of inertia, settling for off-the-shelf, status-quo plans that simply don't live up to legitimate fiduciary standards.
What sort of outside force might shake sponsors out of their complacency? Here's a partial list: Employee revolt (unlikely*), litigation (unlikely in the short term for all but the deepest-pocketed sponsors, but a near-certainty for some plans in the medium or long term), legislation (the PPA is having some effect, but at this point it's more muted than many observers expected), regulation (last week's QDIA decision will help), and genuine fiduciary guidance from trusted advisors (especially attorneys, accountants, and investment professionals, but also fellow business owners and executives who recognize the profound importance of getting retirement plans right--and the very real risks of getting them wrong).
The bottom line is that sponsors need help from people who should know non-fiduciary plan characteristics when they see them. Without that kind of intervention, retirement plan inertia will consign millions of Americans to much poorer long-term outcomes than they could--and should--have enjoyed.
*Just how unlikely? That leads us to Encounter Three. Last night, we heard this from a plan participant: "Who cares what the fees are!? My employer matches 3 percent!"